A New Business Model for Car Dealerships

A Car Supply Shortage

For decades, Americans have visited car lots, chosen a vehicle, and driven home in their new rides. Now this pattern may be permanently changed. The supply of cars at dealerships is about 25% smaller than it was pre-pandemic. During the early stages of the pandemic, car factories shut down. Though most of them are up and running again, there is still a supply shortage.

As a result of this dip in supply, many people purchasing cars are picking out a model, then waiting a few weeks before it arrives. Though this takes away the instant gratification of buying a car and driving it home, leaders in the auto industry and the dealership industry are realizing that this model is boosting their profits.

Rising Demand for Cars

In addition to supply being tight, demand for cars has also spiked during the pandemic. People are feeling wary of public transportation and planes so they are purchasing cars. This has created a seller’s market where car companies are able to charge record high prices and steer consumers toward certain models.

When auto companies have more control over which models consumers are buying, it allows them to offer fewer models, simplify their supply chains, and cut costs. For dealers, the new business model of displaying fewer cars allows them to save space. This is already having an impact on the market for dealership real estate. Dealers are also turning over cars more quickly with this new business model. Last month, the typical new vehicle sold after only 56 days on a lot. This is 27% less time than sales took during the same month a year ago.

Looking Ahead

GM (GM), Ford (F), and Fiat Chrysler (FCAU) all reported strong third-quarter results. Their profit margins in North America hit record or near-record highs. Many dealerships also reported strong results during the summer and fall.

Current market conditions have been compared to the European model of selling cars. For years, European customers have picked out cars and then waited for significant periods of time before their new ride arrives. Both dealerships and automakers have been trying to shift toward offering fewer models and lower inventory for some time. Now, the pandemic has created these conditions.

Though car companies and dealerships might like these market conditions to stay in place, some analysts expect that eventually car buyers will regain some leverage and brands will shift back to the old model to compete for customers’ attention. On the other hand, consumers could get used to this model and it could be here to stay.

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